Linking credit guarantee to MSE ratings can boost lending

Micro and small enterprises (MSEs) are expected to benefit from the government’s move to double the eligible credit limit under the Credit Guarantee Scheme (CGS) to Rs 2 crore from Rs 1 crore and extend it to cover loans given by non-banking finance companies (NBFCs).
 
However, there are challenges, including the high-level of guarantees given under CGS, procedural delays under claim settlement and interest rate restriction. For one, in the past five financial years, the Credit Guarantee Fund Trust for Micro and Small Enterprises has approved guarantees totalling Rs 89,258 crore, compared with its corpus of Rs 2,432 crore. Further, collateral-free or unsecured lending, especially to start-ups, is intrinsically riskier than financing MSEs with vintage businesses and the risk may not get priced within such interest rate caps.

 
CGS caps the downside risks for lenders by offering recourse to the guarantees. However, some private and foreign banks, and NBFCs, consciously enter the high-risk zone of unsecured loans with an eye on the high rewards. Such loans typically have a ticket size of Rs 25-50 lakh and tenures of two to three years, with the interest rate at 18-19 per cent, which is far higher than those on loans by public sector banks. Predictably, private banks have largely stayed away from CGS so far. Now, though the scheme has been opened to NBFCs, it is possible that they too would prefer a high-risk-high-reward pricing approach over CGS lending.

 
Says Manish Jaiswal, Business Head-SME Ratings, CRISIL: “The ratio of guarantees approved to overall corpus is high at 36 times. CGS can deepen financial inclusion through a transparent, independent and efficient claim settlement process that would involve a fee-based, robust credit health assessment of both MSEs under the Performance & Credit Rating Scheme, and of lender portfolios.”